Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Ted clipped the article in the middle. The "effort" that it is attempting to discredit as incoherent is the following thesis (my paraphrase):
Corporate tax cuts were supposed to stimulate growth and jobs. Since much or most of this money is being used for stock buybacks, the corporate tax cuts are not so successful.
Sounds pretty coherent to me, especially given the fact that major corporations were already sitting on top of piles of cash, not being used for growth or jobs, before they were handed even more cash.
We can look at the body of the column to see how incoherent the column itself is. It offers the example of a company with two shares, a factory worth $100, and $100 of cash. So book value is $200, $100/share. By hypothesis the company has inept management, so the $100 cash, "would be valued by the market at $60, and the company’s total value would be $160, or $80 a share."
To be more precise with the phrasing, the company's total market value would be $80/share. Apparently this company's management is so incredibly inept that when it did its buyback, "it spent the $100 to buy back one share."
To drive home the point that the management paid $100 for a share trading at $80 on the open market, the rest of that sentence in the column says that: "the other share would rise from $80 to $100".
This may be one of the most ridiculous arguments I've ever read, falsely equating market value with broader economic value. What's good for shareholders isn't necessarily at all good for the economy as a whole. Moreover, causing a stock price to rise actually adds no capital internally to a company to help grow its business, hire more workers etc. Companies get capital to grow via public offerings of shares or bond issuance. This is why the Bush-era dividend tax cuts made no sense at all from an economic growth standpoint. Being pressured to pay a dividend is actually a disincentive towards economic growth. Capital is leaving the company's coffers and is instead going into the hands of investors who may put the money under a mattress, buy foreign made goods and generally do nothing with it. If economic growth really was the aim--it isn't.--tax cuts would be targeted towards venture capital creating new businesses, company R&D investments and more specifically hiring American workers. The more jobs you create, the bigger the tax cut. Cutting taxes on profits incentivizes profit maximization, not job growth.
In the article's example:
Now suppose Company B has an idea for a profitable new venture that will cost $100 to get going. The most natural move for investors is to invest their $100 in Company B by buying its stock or bonds. With the infusion of cash, Company B can now fund its venture.
That is only true when the company has its IPO, does a secondary offering or issues new bonds. Otherwise, paper is just trading hands and the company gets no new capital. If Company A buys back its stock with its $100 in cash it now has $100 less it can use to reinvest in the company and help it grow. It also has $100 less to pay its own debts, putting the company in increasing risk of default and going out of business. Share issuance for new ventures encourages economic growth, not buybacks.
Comments
Corporate tax cuts were supposed to stimulate growth and jobs. Since much or most of this money is being used for stock buybacks, the corporate tax cuts are not so successful.
Sounds pretty coherent to me, especially given the fact that major corporations were already sitting on top of piles of cash, not being used for growth or jobs, before they were handed even more cash.
We can look at the body of the column to see how incoherent the column itself is. It offers the example of a company with two shares, a factory worth $100, and $100 of cash. So book value is $200, $100/share. By hypothesis the company has inept management, so the $100 cash, "would be valued by the market at $60, and the company’s total value would be $160, or $80 a share."
To be more precise with the phrasing, the company's total market value would be $80/share. Apparently this company's management is so incredibly inept that when it did its buyback, "it spent the $100 to buy back one share."
To drive home the point that the management paid $100 for a share trading at $80 on the open market, the rest of that sentence in the column says that: "the other share would rise from $80 to $100".
So that's how buybacks work
Here's a Bloomberg opinion piece on this same topic:
https://www.bloomberg.com/view/articles/2018-03-06/the-big-and-possibly-dumb-boom-in-corporate-share-buybacks
In the article's example: That is only true when the company has its IPO, does a secondary offering or issues new bonds. Otherwise, paper is just trading hands and the company gets no new capital. If Company A buys back its stock with its $100 in cash it now has $100 less it can use to reinvest in the company and help it grow. It also has $100 less to pay its own debts, putting the company in increasing risk of default and going out of business. Share issuance for new ventures encourages economic growth, not buybacks.